Instructions

ZOOM IN by clicking on the page. A slider will appear, allowing you to adjust your zoom level. Return to the original size by clicking on the page again.

MOVE the page around when zoomed in by dragging it.

ADJUST the zoom using the slider on the top right.

ZOOM OUT by clicking on the zoomed-in page.

SEARCH by entering text in the search field and click on "In This Issue" or "All Issues" to search the current issue or the archive of back issues respectively. If you would like to clear the your search, click on your browser refresh button.

PRINT by clicking on thumbnails to select pages, and then press the
print button.

SHARE this publication and page.

ROTATE PAGE allows you to turn pages 90 degrees clockwise or counterclockwise.Click on the page to return to the original orientation. To zoom in on a rotated page, return the page to its original orientation, zoom in, and
then rotate it again.

CONTENTS displays a table of sections with thumbnails and descriptions.

ALL PAGES displays thumbnails of every page in the issue. Click on
a page to jump.

8 Policy • Vol. 30 No. 3 • Spring 2014
FEATURE
COASE LOOKS AT CHINA
Property rights and transaction costs revisited.
wrote with Ning Wang a book titled How China
Became Capitalist (2012). There, Coase and his
co-author apply his theory to the extraordinary
transformation of the chinese economy without
having to assume well defined property rights, zero
transaction costs, or indifference to distribution
effects. This book demands giving up the Coase
theorem and formulating a more complete coase
theory than is currently taught.
Stigler on the Coase Theorem
in the century following J.S. Mill’s discussion of
the limits of laissez faire in 1848, the economic
profession slowly widened the number of cases when
a free market failed to deliver efficient outcomes.
Pigou’s case against free markets was that they were
inefficient due to an endless number of external
effects. in his study of The Economics of Welfare
(1920, 1932), he argued that social welfare often
did not coincide with the private welfare sought
by market participants, as for example happened
with the proverbial factory freely belching smoke or
Dr. Fleming discovering penicillin. In those cases,
the state could impose taxes or grant subsidies to
channel private activity fully into maximising
social welfare. This idea of Pigou’s
became the accepted doctrine of
the profession in the first part of
the 20th century.
Ronald Coase turned the tables
on Pigou with three arguments:
that people and firms often
corrected externalities by mutual
R
educing Ronald Coase’s doctrine on
the problem of social cost to a so-
called ‘Coase theorem’ does little favor
to his outstanding contribution to the
theory of market efficiency. Many of us economists
have made this mistake when following Stigler’s
summary presentation of Coase on externalities.
I myself have taught year after year that, given well
defined property rights and zero transaction costs,
all so-called externalities can be solved by agreement
between the affected parties, if one leaves aside changes
in distribution resulting from such agreements.
This reduced form of coase’s structural model (if
I may use these concepts taken from econometrics)
fails to do justice to his thought. True, there were
ambiguities in his presentation that made such
a mistaken interpretation possible. But a proper
interpretation of Coase’s theory will make it much
more useful in explaining real problems than his
theorem can do.
The assumption of zero transaction costs,
that of well-defined property rights, and that of
ignoring distributional effects, are not necessary
for understanding the social forces that coase
uncovered. Indeed, the criticisms of such authors
as cooter or Buchanan lose much of their sting
if one does away with those three assumptions.
Cooter showed that Coase’s theorem is not valid
in non-competitive or small number situations.
Buchanan objected to the implication of some
Coasian formulations that efficient social outcomes
could be observed from the outside as if by some
neutral all-wise observer. These objections are
properly directed to coase’s theorem but not to
coase’s theory.
The need for a reformulation of coasian
doctrine becomes evident when one reads the
great man on the Chinese economy. When he
was celebrating a century of a fruitful life, Coase
Pedro Schwartz is president of the Mont Pelerin Society,
an adjunct scholar of the Cato Institute, and Rafael del Pino
Research Professor at the universidad CEu San Pablo de
Madrid.